Compassionate Economics: the liveliest new idea around

I've just read the most intelligent political tract of 2009, and the best analysis of the credit crunch. Compassionate Economics by Jesse Norman was in fact published at the end of last year. The thing is, I'm a very slow reader. My school once ran a course on how to read more quickly, but I had to miss it: I was in a chess match or something. I sometimes think that missing that course altered the direction of my life and that, had I taken it, I'd have become a literary editor. Never mind: this book was worth waiting for.

By a quirk of dates, Compassionate Economics was largely drafted before the financial crisis hit, then tweaked in the light of events. Which is what makes its underlying thesis so compelling. For it soon becomes clear that very little tweaking was needed. The author sees such collapses as an inevitable consequence of current economic theory: he was, in other words, one of the tiny number of people who were wise before the event. And, for that matter, wise during the event: his modest plan to reform corporations so that investors be encouraged to behave like proprietors rather than speculators would do more for our economy than any number of bail-outs and stimulus packages.

What's Jesse Norman's big idea? Good writing is inevitably diminished by précis, but here goes. At its merest, Compassionate Economics is a defiant critique of the current approach to economics, now prevalent in every university and every government department, which treats the subject as abstract, scientific and beyond the layman. It seeks to return to Adam Smith's view of economics as a moral philosophy, concerned with human actions and explicable in plain English. Market models that were devised as illustrative tools – perfect, sterile worlds, in which all human beings are self-interested consumers – are now treated by functionaries as an ideal to be approached. Jesse calls such models "rigor mortis economics", on grounds that, while mathematics brought rigour to the subject, it also brought mortis. The real world isn't described by the graphs and equations of the main textbooks. People are often irrational – collectively as well as individually.

Forty years ago, most politicians felt they ought to equip themselves with a rudimentary knowledge of economic theory. Sadly, as Jesse shows, the theory which they took the trouble to master, and which continues to shape policy, is wrong. What policy-makers need nowadays, as this blog keeps arguing, is a rough grasp of evolutionary biology and behavioural psychology – notably of the ways in which people are often genetically predisposed to behave in ways which, according to pure logic, are not in their interest. For example, had policy-makers understood our bias towards present gain over future risk, the credit bubble might not have blown up in the way it did.

This summary, though, does little justice to a rich and rewarding text. Quite apart from anything else, it is beautifully written. Jesse describes the pure market model by borrowing from Auden's Achilles' Shield: "An artificial wilderness and a sky like lead. A plain without a feature, bare and brown, no blade of grass, no sign of neighborhood, nothing to eat and nowhere to sit down." Having worked in the City and as a philosophy don, he draws evenly on classical thought and contemporary economics without sounding in the least contrived.

His monograph deals with big ideas, not with policy prescriptions. It is about how we think of ourselves, not about school vouchers or welfare reforms. But its policy implications are ground-shaking. Once again, Jesse Norman, currently the Conservative candidate for Hereford, has marked himself out as one of the giants of the next parliamentary intake. Don't take my word for it; read his book.